British Pound Blown Away After Bond Market Unravels, Storm Rachel Gathers

“Now it is the top sold currency by [systematic hedge funds] almost every session, and despite selling for 3 sessions, [real money] have not even scratched the surface of their longs,” - JPMorgan trader.

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The British Pound fell against an unraveling US dollar and saw larger losses in many crosses on Wednesday after the Sterling bond market unraveled across the curve, driving long-term financing costs to their highest since 1998, and as Storm Rachel continued to gather over the UK economy.

GBP/USD fell steadily from the opening bell in London even as the US Dollar itself fell almost 1% against other majors including the Japanese Yen, Swiss Franc and Euro, and despite government GILTS falling across the maturity spectrum, driving yields and yield spreads higher while doing little to help Sterling.

Weakness in the Sterling bond market was incongruous with the price action seen in other European capitals as well as inconsistent with the extended rout in the London stock markets, and was indicative of continued capital flight having weighed on the currency due to sales from a broadening array of investors.

“This is the very worst of outcomes for sterling - rising yields and terrible growth prospects (domestic and globally). Breakfast this morning will not taste good for [Rachel] Reeves,” says Laoise Ni Thighearnaigh, a trader on the FX desk at JPMorgan, in a Wednesday market commentary.

“We are also still coming from a really benign market stance on the pound where bears had just about given up only a week ago, and now it is the top sold currency by [systematic hedge funds] almost every session, and despite selling for 3 sessions, [real money] have not even scratched the surface of their longs,” she adds.

Above: GBP/USD shown with GBP/JPY, GBP/EUR and GBP/CHF. Click for closer inspection.

Selling of GBP/USD and losses for Sterling persisted throughout the London session, with the Pound only then gaining some respite after the local equity and bond markets closed for the day following a run of losses that has significant negative implications for an already-abysmal UK economic outlook.

In particular, bond market rout has raised the cost of 30-year financing and refinancing for the taxpayer to rise over and above the levels seen in the September 2022 market meltdown, and to their highest levels since 1998, with potentially ruinous implications for the Chancellor.

This is because her dogmatic adherence to a now-toxic set of self-imposed ‘fiscal rules’ - themselves being archaic relics of the European Union membership era - risks leading HM Treasury into further sweeping spending cuts, and/or further economy-stifling tax increases later this year.

“EURGBP and GBPJPY are the vehicles (I am still not quite certain on the broad dollar). We are most focused on [EURGBP] and are attacking a very significant resistance here at 0.8620/40 [support zone at 1.1574/1.1600,” Thighearnaigh says.

“Prudence dictates we take further profit, but we are keeping some for the reach to 0.87 [1.1494 in GBP/EUR] in the short-term, before we reassess and look to formulate a more medium-term plan,” she adds.

 Above: 10-year and 30-year GB government bond yields. Click for closer inspection.